@Phil Sharp
What I like to tell people when they ask me if a Property is a Cash Flowing Property, I want them to FULLY understand what they are saying, and then ask me the question again.
To fully understand, here is an Example:
Investor 1 is thinking of buying 100 Main Street all cash and it will cash flow $1,200 per year or $100 per month.
IS THIS A CASH FLOWING PROPERTY?
Now, Investor 2 is thinking of buying the SAME EXACT Property, 100 Main Street, with a Mortgage at 100% LTV, fully financed.... and the Monthly P&I will be $200 per month. This property will have a NEGATIVE Cash Flow of -$200 per month.
IS THIS A CASH FLOWING PROPERTY OR NOT?!
It's the same property..... but the difference is how Investor 1 and 2 bought it!
You cannot really answer the question if an Investment is Cash flowing or NOT because it's not up to the INVESTMENT to cash flow.... it is the INVESTOR that cash flows the Property OR NOT.
I see it time and time again, in every single book, guru or not.... the CHARACTERISTIC of Cash Flowing is NOT about the INVESTMENT... it's about the INVESTOR.
This is why we need to focus on other things like Cap Rate and especially IRR.
Here is another example with a Spreadsheet:
You are thinking of buying 1 of 2 properties. They both require the same investment, $10k.
Conservatively, you anticipate in 10 years that the property will not receive ANY appreciation. Therefore, you anticipate it will be sold and you will get back your $10k.
You can do several analysis with this NO APPRECIATION assumption.
The normal way people do their Cash Flow Analysis is that they make the assumption that the Cash Flow NEVER changes.... by the way, this is a TERRIBLE assumption because it ALWAYS changes.
The reason why they make that assumption is because they just don't know how to calculate with ease how to take into account fluctuating Cash Flows.
In this snapshot, I have 2 Scenarios. Both are based on investing $10k and selling to get back your $10k. Then, Scenario 1 you get your consistent cash flow.... WHICH IS A WRONG assumption, but I did it to show that you can perform the same analysis with an IRR.
The 2nd Assumption has a start of a negative cash flow but will wind up increasing over time. That's a very typical scenario in NYC, for instance. NOTE, there is no ASSUMPTION of Appreciation because the column after the years uses $10k to investment and $10k as the sales proceeds.
Here is what the two scenarios look like side by side:
So it is as easy to do this kind of Analysis.
The typical Investor on here will just take $1k on the very first year and divide it by the Investment of $10k = 10%. They understand that.
But what they are failing to understand is that what you have done is assume that the future cash flows will ALWAYS be the same. So that means that the IRR over the 10 years will be 10% as the 1st Scenario demonstrates.
In the 2nd Scenario, I start of negative $50 per month. BUT.... as I know there is a very large development of a Train Station HUB just a few blocks away, I am using my intellect and know that it will eventually increase my rents as the demand for the area increases.
Eventually, 10 years from now, and that Train station hub is opened, I will reap the reward of approximately $4k per year or $383 per month increase in cash flow.
You cannot do this kind of analysis with a Cash on Cash Return.
You need the Internal Rate of Return.
When you want to talk to the big boys, the Investment Bankers, the Commercial Lenders, your own Partners, sophisticated investors, etc., you need to understand IRR, how it works and why the one shot CoCR is just not correct.
When you really understand these calculations.... the all kinds of scenarios can be modeled.
When you understand all kinds of scenarios, you can begin to predict the future with accuracy as you use your God Given Intellect. After all, we are thinking beings.... so let's put on our IRR thinking hats!
